Accounting Formulas | Definition, Calculation and Utility

Accounting Formulas

The basic accounting formulas, for example the accounting equation:
Assets = Liabilities + Equity

In this main equation of accounting, we can summarize in a simple way the three data used: the liabilities, which represent what you have to pay, are added to the equity, which constitutes the part of the company that you own, to constitute the assets that correspond to what your company owns.

Accounting Formulas (Basic)

Company Assets = Liabilities Company Liabilities + Company Equity
Company Asset = Debt + Operating Capital + Operating Income – Operating Expenses
Company Assets + Operating Costs = Debt + Operating Capital + Operating Income

Asset = Debt + Capital + Profit
Asset = Debt + Capital + (Income – Expenses)
Assets = Debt + Capital + Income – Expenses
Assets + Expenses = Debt + Capital + Income

It is a resource owned by a company that will provide economic value in the future.

The basic accounting formula is ASSETS = DEBT + CAPITAL

ACCOUNTING FORMULAS for commercial enterprise/trading company:

Net Sales = Sales – Sales Allowances – Sales Returns
Net Purchases = Purchases + Purchase Transport Expenses – Purchase Discounts – Purchase Returns
Cost of Goods Sold = Net Purchases + Beginning Inventory – Ending Inventory
Gross Profit = Net Sales – Cost of Goods Sold
Operating Profit = Gross Profit – Operating Expenses
Net income = operating profit + operating income – outside operating expenses
Net profit after tax = net profit – tax

Net income

Net income = Income – Expenses

Here, income includes everything that comes from your sales but also any other sources of money for your company. Opposite, expenses correspond to the costs associated with your sales. By subtracting the former by the latter, you get the net income, which is what you will actually earn.

The margin rate on variable costs

Variable cost margin rate = (Sales price – Unit variable cost) / Sales price

This is a bit more complex formula. The variable cost margin rate is necessary to calculate the breakeven point. It is obtained by dividing the difference between the selling price and the variable unit cost (what it costs you to manufacture or run these products / services) by the selling price (it is quite normal to find two times the selling price in this accounting formula).

Profitable level

Break-even point = Fixed costs / Margin rate on variable costs

We first take the fixed costs of your business, that is, the recurring costs that you can easily predict, which are divided by the margin rate on variable costs, calculated above. With this calculation, we get the threshold value corresponding to the quantity of products or services sold from which you start to make money.

The profit margin

Profit margin = Net income / Sales

Net income, as discussed above, is the amount of money you have left after all of your expenses are withdrawn. You divide that amount by the total number of sales you made to get your profit margin. The higher the profit margin, the healthier your business!

Read also: Accounting Journals | What are Journal Entries in Accounting?

The debt ratio

Debt ratio = Total liabilities / Total equity

Here, total liabilities are everything you have to pay, from bills to loan repayments. Total equity is everything that belongs to the owners of your business, that is, the money invested in the box. By dividing the first by the second, we get the debt ratio: the more funding for your business comes from external funding, the higher this rate.

Balance sheet formula

Assets – liabilities = equity (or assets = liabilities + equity)

This basic formula must stay in balance to generate an accurate balance sheet. This means that all accounting transactions must keep the formula in balance. If not, the accountant has made an error.

Retained earnings formula

Beginning balance + net income – net losses – dividends = ending balance

Income statement formula

Revenue (sales) – expenses = profit (or net income)

Keep in mind that revenue and sales may be used interchangeably. Profit and net income may also be used interchangeably. The income statement is also referred to as a profit and loss statement.

Gross margin

Sales – cost of sales

Gross margin is not a company’s net income or profit. Other expenses, such as selling, general, and administrative (SG and A) expenses, are subtracted to arrive at net income.

Operating income (earnings)

Gross profit – selling, general, and administrative (SG and A) expenses

Statement of cash flows formula

Beginning cash balance + cash flow sources (uses) from operations + cash flow sources (uses) from financing + cash flow sources (uses) from investing = ending cash balance

Thesse accounting formulas adds cash sources and subtracts cash uses.

Inventory formula
Beginning inventory + purchases – cost of sales = ending inventory (or beginning inventory + purchases – ending inventory = cost of sales)

Net sales formula
Gross sales – sales discounts – sales returns and allowances

Book value of fixed (depreciable) assets
Original cost – accumulated depreciation

Straight line depreciation
(Original cost – salvage value) / number of years in useful life

Salvage value is the dollar amount that the owner can receive for selling the asset at the end of its useful life.

Depreciation Formulas

Depreciation is an indirect expense charged on tangible fixed assets in a systematic manner to provide the actual cost of an asset over its useful life is proportionate to benefits derived from such assets. Depreciation is an important part of accounting records which helps companies maintain their income statement and balance sheet properly with the right profits recorded.

A. Straight Line Method (Straight Line Method)

The amount of depreciation each year can be calculated using the formula:

Straight Line Depreciation Method = (Cost of an Asset – Residual Value)/Useful life of an Asset.

B. Double Declining Method

Double Declining Balance Method = 2*(Beginning Value – Salvage Value)/Useful life

Step2 Calculation:

1. Determine the depreciation rate

Tariff = 2 x (100% / EU)

2. Amount of Depreciation = Rate x Book Value

Book Value = Cost – Accumulated Depreciation

C. Sum of the years Digits Method (Diminishing Balance)

Diminishing Balance Method = (Cost of an Asset * Rate of Depreciation/100)

D. Unit of Production Method

Unit of Product Method = (Cost of an Asset – Salvage Value)/ Useful life in the form of Units Produced.


EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization and is a metric used to evaluate a company’s operating performance. This can be seen as a cash flow representative of all the company’s operations.

EBITDA formula

EBITDA is calculated from the contents of the income statement using the following formula:

EBITDA = net income + interest + taxes + depreciation + amortization

Sources: Corporate Finance Institute, Investopedia

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